A short sale is a transaction where a bank agrees to accept less than what it is owed on a mortgage from a potential buyer in order to release the property and absolve the current owner from a possible foreclosure. In most scenarios, the owner will not be liable for the remaining amount due and the owner can escape the financial obligations of the property without foreclosure or bankruptcy. A short sale is a win-win situation for all parties involved: the buyer gets the property for a reduced price, the lender receives a monetary payoff rather than having the expense of a foreclosure action, and the owner walks away from the property and away from the stress of unaffordable payments. Short sales also help reduce the overall foreclosure rate so that neighborhoods can recover from the foreclosure crisis that has been affecting housing prices across the nation. Another benefit to the owner is that a short sale is usually reported to credit bureaus as “account paid in full”. However, it is important during the negotiations to make sure that the lender agrees to this in writing.
Short sales are difficult to manage when there is a second lien on the property held by a different servicer. Usually that servicer is unwilling to take a total loss, and is also unwilling to negotiate with the primary servicer. Also, as with loan modifications, there is rampant fraud associated with short sales. It is advisable never to sign over your property to a “short sale investor” or any person who promises quick results. It is best to hire experienced real estate professionals, including a real estate attorney to assist with this process.
Short sales are being encouraged by the Obama Administration in a new initiative that was released in March 2010, and became effective on April 5th. The Home Affordable Foreclosure Alternatives plan, or HAFA, is aimed at homeowners who have already qualified for the government’s primary foreclosure prevention options and have been unable to complete their reduced mortgage payments under that plan. The intent behind the HAFA program is to streamline the short sale process, and to spread the word to educate the public about this foreclosure avoidance option. Under the new program, the mortgage servicer will receive $1,000.00 in compensation to comply with the short sale option. If there is a second loan on the property with the same lender, the lender can get another $1,000.00. And, the government will give distressed homeowners $1,500.00 in “relocation assistance” under the program.
Homeowners must qualify for assistance under HAFA, and can be pre-approved for short sales before listing the property to simplify the process. Before a borrower is approved, the mortgage servicer must determine the minimum acceptable net proceeds that the investor can accept from the sale of the property. Servicers are held to strict standards under the plan to ensure that the approval process is fair and even handed. It is important for consumers to work with real estate professionals who have experience with short sales so that the process is handled proficiently.
